Since I've been getting a lot of headaches from parents, relatives and friends about "why the hell are you leasing, you're losing money!" commentary, I wanted to post an article discussing why leasing is generally more beneficial than buying a car outright. I'll explain by example on the RX-8 I'll be leasing.

First, I pay less money up front. Say 1500 down, as opposed to a finance you pay 5 grand+, if you want to get a good price monthly.

Next, the monthly payments are lower. I'll be paying ~400, as opposed to ~800 for a finance on 5 years. Now you'll say, after 5 years you own it! But ask yourself this... is it easier to budget in 400 a month for the rest of your life, or 800 a month for 5 years? Sometimes the latter is difficult, especially since this will be my first car I am buying under my name (i paid for my Millenia but it was under my dad's name).

Lastly, the arguement is made about mileage. Leases have restrictive mileage but you can buy more up front, or just stick to what you're given (I'm getting 15k a year and that should cover me fine). In a finance at the end... let's say you put 18k miles a year on your car for all the 5 years of ownership. You say you don't pay for it... but you do. When you re-sell the car part of the cost computed is how many miles you have on the car.

Equity is another concern. In a lease you have no 'equity' in the car. However at the end of the lease, you can just buy the car for the residual value. At the end of my Millenia's lease as well, I was able to negotiate the buy-back price of the car and get it for a few grand cheaper, for a current market rate.

In the long run you DO pay more with a lease.. but you have more options available to you. Take the money you'd dump into a down payment, let's say as a round number, 10 grand. That 10 grand could be invested with a return of 10% a year which is 1000 bucks. So instead of investing that money, you decide to dump it into a depreciating asset, a car.

Financially, it's actually smarter to go with leasing. Specially if you own a business.

So in conclusion folks... (repeat with me now) you do not put a vast amount of money into a DEPRECIATING ASSET.

Any good financial advisor would tell you that.

Yah, but the guys on the other end of the lease get pissed when you strip the interior, mod the hell out of the suspension and engine, and take it road racing. :)

j/k

Okay, so what's the difference between "finance" and "leasing", I may be missing a US terminology difference here. By leasing do you mean hire-purchase? Mazda offer a hire purchase scheme here (guranteed resale price etc.) but the maximum term is too short for my money and it doesn't look like very good value anyway.

Being short-sighted I'm really only looking at the monthly bottom line. I'll get a quarter of the RX-8 or better from selling my current MX-5, plus some savings. Hence, loan for £15-16,000, which amounts to around £300 per month over 5 years. Not bothering with "payment-protected" loans, rip-off AFAICT given the risks. I work in console game development and that's proven to be a remarkably recession-resilient business. :)

Financing refers to paying money for a car over a specified time, until you own it. Generally you have to have a LOT more money out of pocket (like you said, 15 grand), plus a monthly payment.

A lease is essentially a rental with the option to buy at the end of a specified period (usually three years). Money out of pocket is minimal (about 1500), and monthly payments are also lower.

The only bad thing in a lease is that you don't own anything at the 'end', and you pay the payments as long as you're in the lease. Essentially you make payments for the rest of your life (if you continue leasing, like I will), but those payments are much lower (and as I pointed out above), much easier to budget in.

Hi lurcher

Bottom lines can be a lot like statistics. They can be easily misunderstood. Let's take a look at some real numbers.

In 1999 I leased an Integra SE. The final purchase price was $24,000 minus the $1,500 for a trade in. The Honda lease rate was 8.4% for a 48 month lease (most people take a 36 month lease). Here in Canada a lease means you only pay tax (15%) on the monthly amount paid. My monthly payment was $360 with tax is $414. The lease ended in February, the lease buy out was $11,000. I had to pay 15% on the $11,000 (1,650). So I paid $12,650 for a car that is currently selling around $17,000.

48 x 414= 19,872 (tax included)
buy out = 12,650 (tax included)
Total = 32,522

Since I did buy out the car, I have to factor in the buyout over the 48 months (12,650 / 48 = 264) so my true monthly payment is $678 per month. But keep in mind that because I own my own business I can write off the taxes every month. So the real payment is $360+$264=$624 but no asset and can't claim depreciation however I can claim a % of the $360 payment based on the usage.

If I were to purchase the car with $1,500 trade in ($0 down payment), at the time the best financing rate I could get was 9.5% for 48 months (business was young with most assets being intellectual).
Amount financed = 25,875
Interest paid = 5,328
Total = 31,203 with payments of $650.

The bottom line says that I could have saved $1,319 in interest payments but with a monthly payments of $650. I couldn't write off the taxes but I could write off the depreciation over 5 years. But the assets would be tied to the company.

Excluding the tax savings, leasing with buyout is roughly $678/month versus $650/month finance. On the surface it doesn't appear that leasing was worthwhile. But in reality, it was a real advantage for me. First, to finance it I would have to put some money down (means cash flow hit to the company or my pocket book), also with leasing if the car was worth less then the residual ($11,000) I could have walked away and the car would have cost $17,280. With leasing, the payments were only $360/month which can be advantageous when cash flow is low. The company walked away from the car therefore $17k shows on the books but I bought the car and thus can pocket the balance between residual and sales price. Can't do that if the company purchased the car. All I had to do was put aside $250 per month of my own money for the balloon payment at the end of the lease and keep the car. Or keep the money put aside, sell the car and use the difference (about $4,350) as a down payment or use as a trade in for the next car.

If you do put money down, then financing makes the bottom line look a lot more alluring with lower charges. But financing requires at least $5,000 down. It would have saved an additional $1,000 in interest over 4 years for an asset that depreciated 30% in 4 years (most North American cars will lose over 50% over the same period). Not a good investment in my books. I prefer to take that $5K and put it into something that can average 10% return and I'll be way ahead of the game (same savings but my capital still intact). If I decided to finance I would not put money down, I would invest it instead (finding something with a 10% return isn't that easy but it is available if you are willing to take a modicum of risk).

So in order to get ahead with leasing, you need a good spread between leasing rates and financing rates (bigger the spread the better), you must select a car that has a significantly higher resale value then its residual (in other words forget most North American cars) or you own a business that make use of a car and you can write off the taxes and some of the payments as usage. If like in my case you do both, then you get to have your cake and eat it too. :D

The RX8 isn't as good retaining its value as say a Honda Civic but it is still projected to be higher than its residual (based on the history of the RX7).:cool:

Wow, thanks for the mini-essay Mac, I will be investigating leasing more closely.

Theres'a a few posts on the European forum mentioning leasing schemes that are starting to pop up, we're a little behind you on release date (I don't expect mine to arrive until October), plenty of time to look at all the options. :)

One thing that I forgot to mention in that long winded post. A significant issue in leasing is the high cost of breaking a lease. You MUST read the fine print before signing. Also watch out for additional fees that they try to tack on such as prep fees etc. Since you don't own the car you can't make any modifications to it unless you can get it approved. You also have to watch your mileage.

One other thing you guys may or may not care about is auto insurance. Herc. you should know that here in NJ you get REAMED on auto insurance. If you lease the car you are forced to have full coverage on it always. However, if you finance it, after the four/five years when you own it, you can drop full coverage and save yourself quite a bit. That is also a risk, but it'll save you money as well.

To be honest, I'd rather buy the car, especially if I'm planning on keeping it. Leasing it for 4 years and then tossing it seems silly if I like the car. Financing it for 5 years and then keeping it and dropping down to minimum coverage and saving myself some cash by having no payment and lesser insurance allows me to save up for my next down payment quickly or invest that money then.

Just another way to look at it....

BTW, Where in NJ are you Herc, I'm in southern by A.C., maybe when we get our cars, we could meet up? Well I still have yet to drive it and my downpayment is refundable if by chance I don't like the test drive, by let's assume I get it :).

Originally posted by Hercules

Next, the monthly payments are lower. I'll be paying ~400, as opposed to ~800 for a finance on 5 years. Now you'll say, after 5 years you own it! But ask yourself this... is it easier to budget in 400 a month for the rest of your life, or 800 a month for 5 years? Sometimes the latter is difficult, especially since this will be my first car I am buying under my name (i paid for my Millenia but it was under my dad's name).


Actually, you can probably buy it for around $550 a month (5 year loan). Unless your credit is soooo bad that you're gettin reamed for it. I'm thinking a decent amount of people can afford another $150 a month......


Lastly, the arguement is made about mileage. Leases have restrictive mileage but you can buy more up front, or just stick to what you're given (I'm getting 15k a year and that should cover me fine). In a finance at the end... let's say you put 18k miles a year on your car for all the 5 years of ownership. You say you don't pay for it... but you do. When you re-sell the car part of the cost computed is how many miles you have on the car.


Yeah, but you don't get any flexibility when you need it. I leased my car when I was working 5 miles from home. Next thing you know, I'm working 92 miles from home. I'm going to pay through the nose now, because I'm wayyyy over my mileage. I would have been wayyyy better to buy, but you just don't know.


In the long run you DO pay more with a lease.. but you have more options available to you. Take the money you'd dump into a down payment, let's say as a round number, 10 grand. That 10 grand could be invested with a return of 10% a year which is 1000 bucks. So instead of investing that money, you decide to dump it into a depreciating asset, a car.


If you're putting down 10g's, then you might as well buy, because your monthy payments will be lower than a lease.

Where will you get a 10% return a year nowadays? All I know is that I'm getting reammed in all my investments.


Financially, it's actually smarter to go with leasing. Specially if you own a business.


True, but how many of us own our own businesses, that can actually claim the car for company use?


So in conclusion folks... (repeat with me now) you do not put a vast amount of money into a DEPRECIATING ASSET.


Here's a checklist of things that makes leasing more beneficial.
-want to drive something more that you can afford (smaller monthly payments
-want to drive a new car every few years

BUT you have to:
-watch your mileage
-return the car and pay for wear and tear.

So in conclusion folks...(repeat with me now), leases will only benefit a specific type of usage.